Mexico's Real War: It's Not Drugs

By Joel KotkinOctober 07 2009

Appearing in:

Forbes.com

Balding, affable and passionate, Uranio Adolfo Arrendondo may not be a general or political leader, but he stands on the front lines of a critical battle facing Mexico in the coming decade. This struggle is not primarily about the drug wars, which dominate the media coverage--and thus our perceptions--of our southern neighbor. It concerns the economic and political forces stunting the aspirations of its people.

For the past 36 years, Arrendondo's small family-owned school, Liceo Reforma Educativa, where he is principal, has served as an incubator for Mexico City's aspiring middle class. Modest and reasonably priced, the school has offered small-business owners, professionals and mid-level managers a way to propel their children up the economic ladder.

Yet today Arrendondo finds many parents lacking the resources for even a modest alternative to Mexico's troubled state-run schools. "The middle class in Mexico is going down," Arendondo told me in his office by the courtyard of the brightly painted school in the largely lower-middle-class Iztacalco, one of Mexico City's 16 diverse delegaciones, or boroughs. "The middle class is predated by both the super-rich and the criminal poor. We are squeezed in the middle of the sandwich."

This predicament is not unique to Liceo Reforma, which has some 245 students. Data from the Asociacion Nacional de Escuelas Particulares estimate that as many as 400,000 people have pulled their children out of small private schools over the last few years, placing them instead in the generally much inferior public ones.

This is just one sign of a worrisome trend toward downward mobility, greatly exacerbated by the economic crisis. And it is all the more painful, as it represents a reversal of progress toward an expanding middle class in the 1970s and 1980s. In those decades, Mexico--spurred by its energy wealth and an expanding industrial base--was finally beginning to break away from its age-old pattern of being a society dominated by a few rich and many very poor.

To be sure, Mexico City's sprawling expanse still exhibits this legacy of upward mobility. A good number of the capital's 20 million people can be seen crowding elegant shopping centers, driving late model cars and eating in crowded restaurants. With the elegant Polanco, not far from the central district, lovely Lomas de Chapultepec, or sprawling, ultra-modern Santa Fe, Mexico City can seem very much a first-world city.

At the same time, however, much of it--including lower-middle class Iztacalco--needs considerable repair. The root of the problem lies in demographics. Although Mexico's population growth has slowed, labor-force growth still outpaces economic fecundity. Victor Manuel, director general of a leading high-tech institute in Mexico City, estimates the country's gross domestic product needs to grow at 7% annually to produce the 2 million new jobs needed each year to keep up with labor-force growth. Over the past decade, that growth has been roughly 3%, and last year declined by as much as 7%.

In the immediate future, many economists expect Mexico's recovery to lag that of both the U.S. and its Latin neighbors, particularly Brazil and Peru. The most recent survey of expectations among industrialists conducted by Canacintra, a leading national business chamber of manufacturers, found more than half expected conditions to get worse, 10 times as many who expressed optimism.

The sluggish economy has had its most dramatic impact on the poor, who constitute upward of 25% to 30% of the population. In contrast to earlier decades, their ranks may now be growing, suggests Alfonso Celestino, a social scientist who works for the government of the sprawling Districto Federal, which includes Mexico City. "Mexico is a first-world city, but large parts are like third-world African cities," he asserts

Particularly notable has been the growth of the so called "misery suburbs" or pueblos nuevos, sprouting in the outer periphery of the city. In these areas, as well as poor inner city neighborhoods, unemployed young people are being "absorbed," as Celestino puts it, into the illicit economy. This burgeoning criminal infrastructure preys directly on the super-rich through kidnappings and their bloody feuds that discourage both investors and tourists.

Yet it is perhaps more dangerous, as violence has grown and poverty increased, that the middle class has begun to recede. Unlike the very poor and the elderly, such families receive little public assistance and often make do by working in the massive "informal economy" that, by some estimates, constitutes as much as 40% of the entire country's gross product.

Even before the economic crash in 2007, large percentages of educated Mexican workers were finding it difficult to get placed in high-skilled jobs. Miguel Angel Juarez Noguez, a junior-high math instructor, graduated with a degree in computer science in 2006, but says few of his friends have found employment inside the information sector.

He believes his parents, both mathematics instructors, enjoyed far better prospects than he and his family--including two children--now face due to a weak job market and rising cost of living. "Today" he suggests, "you need more education to get less."

These problems have been exacerbated by the deep recession in the U.S., whose market created many relatively high-paying industrial and technical jobs. Meanwhile, workers remittances from Mexicans in the U.S., the second-largest source of income for the country after oil, have begun to dry up.

Many discouraged Mexican immigrants have returned home, notes Celestino, but they find few employment opportunities. And Mexico's border boomtowns, which once offered considerable opportunity, are now suffering not only from the American recession but from the shift of production to China. Coastal communities have been decimated by a decline in tourism, a result not only of the recession but also of concerns over violence and swine flu epidemic.

Ultimately, many concede that the basic problem lies not in the outside world but in Mexico itself. Although much can be said for greater transparency and economic liberalism under the current PAN government, most believe the entrenched system of crony capitalism has been barely affected by the political change.

This system--where bribery is commonplace and connections are necessary to build even a small business--stymies growth by undermining innovation, notes technology entrepreneur Victor Manuel. "People come back from schools, or from the United States, with all sorts of skills and money," he notes, "but there's no system here to create an economy they can contribute to."

Such frustrations are heightened by a sense that other countries--notably the BRIC nations of Brazil, Russia, India and China--are rushing ahead while the once-promising Mexico falls behind. These countries appear to be tapping their human and material resources more efficiently and strategically than Mexico. "There is no vision from the state," Manuel says, echoing a common refrain.

Edgar Moreno, a 37-year-old M.B.A. who currently works for Hewlett-Packard at the ultra-modern Santa Fe district southeast of the city, agrees that political dysfunction is the main impediment to progress. Corruption and inefficiency hamper the development of the nation's potentially huge energy resource, and that's one reason why Mexico lacks the capital to develop new enterprises. Real interest rates for entrepreneurial ventures start at 12%.

Moreno's own ambition, to develop renewable fuels based on sugar, corn and other crops, is also held back by bureaucratic obstacles that discourage such ventures. "It's not the location of the country that keeps us from developing the way we should," he points out. "It's the laws, the framework, how the government does things. Mexicans have lots of ideas and a lot of interests, but the system is stacked against us."

The surge in drug violence--over 7,000 died just last year--adds to the perception that Mexico may be on the verge of becoming a "failed state." Mexican author Enrique Krauze believes the crime wave constitutes Mexico's "most serious crisis" since the bloody 1910 Revolution, an upheaval that cost more than 2 million deaths.

Yet, however terrible the violence, Arrendondo believes the decline of the middle class and upward mobility presents Mexico with a more lethal, long-term threat. The parents of the Liceo's students, he argues, may not "take up a pistol" like their forebears a century ago but might embrace a return to the anti-American authoritarianism and protectionism of the past.

This would not be good news for America. Mexico stands as our second export market, well ahead of China. Mexicans are also our closest cousins in terms of blood--four in 10 claim to have relatives in the U.S.--and our tastes in food, music and culture increasingly converge.

This suggests that what happens to the kids and their parents at Liceo Reforma Educativa matters to us as well. A thriving Mexico would need to send us less of their poor and could buy more of what we produce. Mexico's fate has at least as much relevance to our future as developments in Iraq, Afghanistan, Europe or even China, where our media and politics focus most of their attention.

"These kids' parents are struggling with opportunities lost and destroyed," Arrendondo told me. "We have to change that. Mexico has to become a place where opportunities are created for kids like these. That's the most important thing to determine the future."

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